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One of my trend following indicators was created because I felt that there were some issues with market breadth that needed attention. For example, the Friday after Thanksgiving. The market is only open a few hours and trading volume is very light. There are price changes but nothing exceptional. However, there is always a full complement of breadth data no matter how long the market is open. It was my feeling that it would be nice to be able to ignore breadth data when daily volume is down, and/or the market wasn’t open for a full day. Hence, a breadth
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Periodically I write an article that reviews the past few months of articles. Why on Earth would I do this? Primarily for two reasons. One is that many new readers are involved and often they do not go back and look at the past articles. Two is that my articles are rarely tied to anything that is happening in the markets. Generally, they are about experiences I have had as a technical analyst for 45 years; the good, the bad, and the ugly. Hence, they have shelf life (well, certainly in my mind they do). You can click on the headers for a link
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Another price-based measure I use in my weight of the evidence is called Adaptive Trend. This was modeled after an indicator from the Bloomberg service called Trender. Adaptive Trend identifies price swings based on the daily trading range. It uses Average True Range (ATR), exponential smoothing, and standard deviation as inputs. The resulting indicator is a trend-following approach not unlike some Parabolic Studies. In an uptrend, a support line will appear below the price. A sell signal is generated when price closes below the support line. In a downtrend, a
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Since there are many new readers, I thought an overview on trend following might be appropriate. As I have stated often, I use a market analysis methodology called trend following. Sometimes it should be called trend continuation. Why? My trend analysis works on the thoroughly researched concept that once a trend is identified, it has a reasonable probability to continue. I know that is the case because most of the time markets are trending markets and I see no reason to adopt a different strategy during a period of mean reverting, such as we have experienced
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Wall Street is loaded with experts who make forecasts on the future market direction and market level many times a day. If you see a rather serious technical analyst on television, you can count on the talking head interviewer to ask him/her where the market is going. They must comply, or they won’t be asked back. The networks know their viewers want to hear forecasts. Years ago, I was on Fox Business and the talking head (won’t mention her name) said I see you like technology because it is in your portfolio. I responded that I did not particularly like
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This article is a follow up of the previous one in this series - Building a Rules-Based Trend Following Model - 6. Table A is an example of the detailed research behind each of the various indicators used in the weight of the evidence. This example uses over 30 years of data; however, it should be run over many different periods to find consistency. Table A is the performance data for the Price Long indicator.
Table A
While the calculation of all the various measures of an indicator’s ability to work over a vast number
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It is time to start getting into the measures/indicators to be used in the model. Note: When I was presenting at the big wire houses, I used the term measures as seemed to be easier for advisors to understand. Now, dealing primarily with technical analysts, indicators seems more appropriate. At some point I'll pick one and stick with it; just remember they refer to the same thing. We will start with Price-based indicators/measures. Price-based means that the indicator is measuring movement in price instruments; whether it be from an index such as the Nasdaq
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I am on record stating that most technical analysts do not trade with real money. I have no hard data to support that brash statement, rather it is my observation after speaking at hundreds of seminars and conferences and knowing hundreds of technical analysts. Many are famous. Many call themselves traders, yet most could not produce their P & L statement if they had to. I truly have no problem with that, if they are good educators and not misleading their audience that they manage money or trade real money based on their analysis. Lots of market
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I had another article planned but think writing about something that just occurred in the market is a much better learning/teaching experience. Trend following has one issue that will constantly plague the investor and usually at the least expected time, and that is whipsaws. I must admit, I think it just takes experience to get used to whipsaws, if you ever do. I hate them, but I also know that trying to adjust a model based upon sound principles so that the whipsaws in the recent past are reduced or eliminated will lead to two things: one, the performance in the past
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The significant components of my Weight of the Evidence are Price Measures and Breadth Measures. All of my Price Measures use the Nasdaq Composite Index which I have written about many times. If using the same price, then the difference between most price indicators is to offer varying time periods; short, medium, and long. Breadth on the other hand, can offer many different indicators of trend. Price is just price; but breadth is advances, declines, advancing volume, declining volume, new highs, and new lows. Those are what I call internal market
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